Hidden wealth: How to be creative with asset-based lending

As construction companies struggle with cash flow, asset-based lending is becoming increasingly popular. Where banks used simply to lend money against land or property associated with a business, the dramatic drop in their value means companies looking for a cash injection need to be much more creative.

Twenty years ago, asset-based lending had limited popularity among construction businesses because it was, incorrectly, viewed as an option purely for those experiencing difficulties. Today, asset-based lending is a fundamental financing solution for construction and building firms looking to expand and improve.

Typically, in the construction sector, loans can be tied to assets such as plants, materials and equipment. Over the years lenders have started offering finance secured against all types of assets, from computer network cabling to maintenance contract invoices.

As a source of funding, asset-based lending can be relatively quick to agree – provided the assets in question are carved out of any senior debt security arrangements – as the lender has security over these assets. However, there is risk (although minimal) to the lender.

If the loan is not repaid, the asset will be seized. Lenders will typically lend about 80-85% of the debtor book. One must be wary of customer concentration, however.

If, say, more than 20% of debts are owed by one customer, then any funder may exclude such debts from the facility.

Some lenders offer specialist payroll finance: that is, salaries are paid and such payments are secured on debts or other assets. However, not all businesses are going to fall within the lending criteria in this regard.

On that point it should be noted that the construction industry is often perceived as a tricky one to fund. Asset-based lenders have concerns – for example, the use of stage payments, the ban on the assignment of debt, the quality of debtors (especially in these times) and whether the main contractor operates a “pay when paid” policy.

Lenders have started offering finance against computer network cabling and maintenance contract invoices

Although many companies are struggling at the moment, those contractors and builders looking to expand through buying up failing competitors can use asset-based lending to their advantage. If their business is otherwise secure but lacking the assets to raise enough money for a takeover, they can always leverage the assets of the target company to fund the takeover. If the balance sheet is asset rich, then prospective borrowers will get more than they would from a traditional cash flow lending model.

This is an efficient form of borrowing as the business can get access to piecemeal chunks of finance as and when needed, and the fact that funding can often be raised quickly is a definite advantage at present. If funded correctly, the business will only borrow the amount of “usage” of the asset as the funder will consider a a residual value element for each category of asset, that is, what could be realised by a distress sale.

Although some better known asset-based lenders have gone to the wall, there are a few specialist lenders in the market (for example, Liquidity and LloydsTSB) that will consider loans in this industry.

Asset-based lending should now be considered by all building companies as way meeting their funding needs, especially as banks are reluctant to lend at the moment and more traditional models of lending are becoming less popular.

Just as we shop around for the best deal for all our insurance needs, so financing a business should be no different. Being aware of all the funding options available, and the associated costs, is imperative, as it is not only important for a business to secure the gross financing it requires, but also to manage the cost of this once it is secured.

Also, in today’s economic climate many asset-based lenders have their own funds that they price competitively, making it a “must have” funding element within the overall debt package.

There is no “one size fits all” approach to funding, so each and every construction business must look to see what it can borrow and appreciate the costs of doing so.

Original print headline - Hidden wealth